As cryptocurrencies fall from recent highs, investors are undoubtedly feeling the specter of 2018. Back then, cryptocurrencies tumbled a combined 81%, wiping out almost $600 billion in market capitalization and sending Bitcoin (CCC:BTC-USD) and other altcoins on a multi-year recovery journey few want to relive.
This time however, looks slightly different. Bitcoin has far wider adoption, particularly among payment processors like PayPal (NASDAQ:PYPL) and Square (NYSE:SQ). And high-profile thefts have also become rarer as security has improved. That makes Bitcoin far more likely to stay relevant, even as prices gyrate.
But Bitcoin’s stability comes at the expense of more limited upside. The cryptocurrency’s $800 billion market cap already makes it the fifth-largest currency in the world. A doubling would make it as large as the U.S. Dollar, while 10x growth would make it more valuable than all the physical gold ever mined.
That means investors looking for the next 100x cryptocurrency need to look at altcoins — smaller cryptocurrencies that still have a chance of making it big. Because when you’re buying a currency worth $10 billion, there’s a far better chance of considerable gains ahead.
What Makes a Good Altcoin?
Bitcoin itself is a technological dinosaur relative to other cryptocurrencies. Blockchain transactions, for instance, cost $15 to perform and takes ten minutes to confirm.
But as the first decentralized cryptocurrency, Bitcoin has maintained its lead thanks to a strong community and widespread adoption. That means successful altcoins will need far more than minor technological improvements. Bitcoin Cash, for instance, remains 80% beneath its all-time highs despite having a higher transaction per second limit than its predecessor.
Instead, successful altcoins will look much more like Ethereum (CCC:ETH-USD), a long-time favorite altcoin:
- Technological leap forward. Successful altcoins need significant improvements from Bitcoin to stand out, whether in security, speed, efficiency or different applications.
- Differentiated purpose. Altcoins also need to stand out from Bitcoin’s shadow of “digital gold” — a store of value — and build a life of its own.
Time for Altcoins?
Altcoins aren’t necessarily for everyone. Even the most promising will stumble if programming flaws emerge — and significant initial coin offerings (ICOs) are often notoriously overpriced, leading to long-term underperformance.
While Bitcoin’s shadow will still loom over the crypto landscape, here are five promising altcoins every investor should know:
- Cardano (CCC:ADA-USD)
- Polkadot (CCC:DOT-USD)
- Stellar (CCC:XLM-USD)
- Celsius (CCC:CEL-USD)
- Neo (CCC:NEO-USD)
Altcoins that gain scale could pose a threat to Bitcoin’s dominance. The legacy cryptocurrency still relies on third parties to batch orders and act as a middleman to overcome Bitcoin’s cost and lack of speed. The next generation of coins promises to perform these tasks independently. Let’s take a look.
Alternative Cryptocurrencies for 2021: Cardano (ADA)
Cardano remains one of the most advanced general-use altcoins on the market. This third-generation coin uses a proof-of-stake system, compared with the standard proof-of-work. That makes the system far more efficient than Bitcoin and faster as well.
The Cardano Foundation also has an all-star team running the show. The currency was started in 2015 by Charles Hoskinson, a co-founder of Ethereum, and retains an active development community. Today, the team is led by digital payments veteran Frederik Gregaard, an old hand who once led PwC’s Digital Financial Services division.
ADA, the currency run on the Cardano Network, has already advanced 4,400% since its initial coin offering (ICO) in 2017. As the currency gains greater exposure, investors ae now seeing price targets of $10 start appearing — significant upside for a coin available for less than $1 today.
Polkadot was founded by another alum of the Ethereum Project — Chief Technology Officer Gavin Wood. And this altcoin takes an entirely different approach to cryptocurrencies.
Rather than host a single ever-growing blockchain, Polkadot uses parachains — multiple blockchains that run in parallel. That solves Bitcoin’s problem of managing a single ledger — one that’s already over 320 GB in size.
The altcoin has seen spectacular growth since its August 2020 launch through efforts like Polkastarter, a decentralized exchange built on Polkadot. Projects have even started attracting attention from Gemini crypto exchange founders the Winklevoss twins, as well as many high-profile sports celebrities.
That makes DOT, the currency on Polkadot, one to watch closely for 2021. The currency has already grown tenfold. But with a $30 billion market cap, there’s still room for this promising altcoin to run.
Ripple (CCC:XRP-USD) co-founder Jed McCaleb started Stellar in 2014 as an altcoin alternative to XRP. The cryptocurrency facilitates cross-border transactions by using a protocol developed by Stanford professor David Mazières.
The system itself uses a trusted network, where each person running the software identifies other trusted partners to confirm transactions. That removes the need for the expensive cryptographic mining Bitcoin relies on to validate transactions.
Stellar’s fundamental reason for growth however, has more to do with rival XRP’s fall. In December, the SEC charged Ripple and two executives with conducting a $1.3 billion unregistered securities offering. Around half of all XRP is still owned by founding company Ripple Networks, and its ICOs triggered regulatory red flags.
Meanwhile Stellar has stepped in to fill XRP’s role. Its system of using trusted partners makes it an ideal replacement for quickly moving money between banks. And with a coin price less than $0.40, Stellar is a currency that could still grow many times over.
Celsius is a smaller cryptocurrency focused on lending and borrowing. Interest rates for would-be borrowers start at just 1% APR, while depositors earn interest on cryptocurrency that would otherwise sit in a stagnant account. Interest rates can rise as high as 15.85% for stablecoins like Tether.
Celsius Network has also wisely registered as an exempt issuer with the U.S. Securities and Exchange Commission (SEC) in 2018, making it far less likely to run into regulatory hurdles.
The system looks particularly promising thanks to its ease of use. Savers can transfer their entire cryptocurrency account to Celsius Network — Bitcoin, Ethereum and all — without converting to any proprietary coin. And borrowers can take out loans by depositing cryptocurrency, avoiding the need to cash out.
There are risks of course. An investigation by Coindesk found instances of uncollateralized lending by the network, where a borrower default would leave either Celsius Networks or P2P lenders with irreversible losses. And there’s always a temptation to make riskier loans that earn higher interest payments.
A sudden drop in collateral values (i.e., cryptocurrencies) can also have a knock-on effect to Celsius’ value. As of writing, Celsius requires a 2.7 ETH deposit to borrow $1,000. At today’s crypto prices, a borrower should willingly repay the loan to retrieve their collateral. If ETH prices plummet however, the same person might instead decide to walk away with the money, leaving Celsius investors hoping that the Network hedged its bets.
Nevertheless, Celsius shows a great deal of promise. CEL is highly differentiated from Bitcoin, and investment risks will decline as cryptocurrency prices eventually stabilize.
Investors might have written off Neo long ago. The China-based cryptocurrency (formerly known as Antshares) went into a tailspin back in 2018 when the Chinese Central Government cracked down on cryptocurrency exchanges. The currency remains almost 80% down from its all-time highs.
Yet change is on the horizon. In April last year, the Chinese authorities began a limited rollout of e-yuan, a government-backed cryptocurrency. People expect the CCP to expand the program during the Beijing 2022 Winter Olympics.
Much of this change comes from a recognition that cryptocurrencies are here to stay. And rather than allow outside players like Bitcoin and Ethereum to push finance out of the CCP’s sight, they have started embracing home-grown cryptocurrencies as alternatives.
Smaller Chinese-based cryptocurrencies have already started emerging. VeChain, another promising cryptocurrency, helps Chinese companies with supply-chain management.
Though it’s impossible to know if the CCP will also anoint Neo a cryptocurrency champion, there’s phenomenal upside to be had if they do.
On the date of publication, Tom Yeung did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tom Yeung, CFA, is a registered investment advisor on a mission to bring simplicity to the world of investing.